The next three weeks I’m going to do an AgSplainer about the Great Microchip Shortage. A combination of factors has revealed crippling and widespread scarcity, manufacturing bottlenecks, and serious national security and economic repercussions.
[Source: Bloomberg]
First, we need to understand where the chips in your car, cell phone, and tools come from. The first step is the design that produces the specifications for the chip. These designers are like architects. Such companies are nicknamed fabless – they don’t fabricate. Those designs are sent to foundries, and they may be the cutting edge of human technology today. Finally, there is a third stage, abbreviated OSAT for companies that essentially package, test, and ready chips for end users. There are companies that do all these steps in house (Integrated Device Manufacturers). Note the US has a commanding IDM dominance, but concentrated on high-end chips. The bubble size is sales, not volume.
The critical nexus in this process is the foundries. There is one big one (Taiwan Semiconductor Manufacturing Company) which not only makes 60% of chips but is at least 10 years ahead of any competitor. There a second merely large maker – Samsung at about 30%. And here is a truly curious note – the only company that can manufacture the advanced chip foundry machines needed by TSMC and Samsung is ASML in Europe. The entire industry has specialized to a degree that one company like TSMC has near control of the market and type of chips produced. Moreover, any competitor would not only have to overtake their technological lead but invest hundreds of billions at the risk of TSMC undercutting any possible profit. Investors do not like those odds. Other key players have similar leverage over other steps.
Now throw a pandemic at this fragile supply chain. Last year some customers, like car makers, cancelled orders for chips expecting a prolonged drop in sales. The supply chain responded by shifting to chips for computers, phones, home appliances, and other devices that actually saw sales increases. And there was some outright hoarding, just like toilet paper.
Finally, as you can tell, Bloomberg is the best source I’ve found for this problem. If you hate mainstream media, this is the one I think you’ll hate least. Next week we’ll look at the demand situation to explain why your new SUV won’t be delivered until fall.
